Pension funds that adopt a responsible investment approach

Regard Budler, Head: FundsAtWork Momentum.

Most working South Africans look forward to a comfortable retirement. Industry research has shown that less than 10 percent of South Africans will be able to retire financially comfortably. Those that are able to retire, will do so on limited income, while others will either be forced to work until they die, or rely on family and friends for some assistance. The latter is likely not the dignified retirement that most envisioned. For those that are able to retire and buy a pension, a few tough decisions are crucial at this time of one’s life to secure a promising future.

The current regulatory environment allows for members who retire from provident funds to take their retirement benefit as a lump sum (after they have paid tax) but for members retiring from pension funds, they are required to buy a pension with a minimum of two-thirds of their benefit. The reality however is that most members, either in pension funds or provident funds, could find that buying a pension results in lower tax being paid on their retirement income.

Various pension options are available, ranging from living annuities, life annuities and with-profits annuities. The distinguishing factor between the various annuities/pensions is the amount of risk a pensioner takes in terms of future pension benefits and the increases thereof. A further risk that is common to all these types of pensions, is the credit risk associated with the pension provider. When buying a pension, the benefit could be paid from retirement to death, and this could be for 20 years plus. As a result, one needs to make sure that the insurance company from which the pension is bought has an appropriate credit rating and sufficient capital adequacy. This will ensure they can honour your pension promise, even after extreme events like a market crash or pensioners enjoying a longer than expected life.

Insurer’s capital adequacy ratios (CAR) is often used in assessing the company’s future ability deliver on their benefit promises and therefore a higher capital adequacy ratio is normally considered to provide more certainty for pensioners.

For the average pensioner, taking all of the above into account would normally be quite a daunting task. As such, appropriately qualified financial advisers can play a crucial role in this regard. Furthermore, with treasury’s retirement reform, financial advisers would like to empower trustees of retirement funds to play a more prominent role in guiding members when they retire. Even though there is no legislation currently in place forcing trustees to pick default pension options for their members, there is already a large number of funds that have been proactive in either selecting default pension options or alternatively, preferred pension options for their members.

Members can therefore be guided by the due diligence processes of boards of trustees in making their decision around their pension options. This should significantly reduce the risk of members buying a pension from a provider with either an inadequate credit rating or one that might not survive life’s inevitable extremes.

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